May you live in interesting times, a purportedly Chinese curse, seems to have fallen on all us. For Michael Spence, the Noble laureate, points out in his new book, The Next Convergence, that epochal changes are happening right during our own lifetimes. This is because of the convergence of growth rates in the developed and developing countries for the first time in more than 250 years. The reason for this new trend is that new technological forces are rapidly reducing the large gap between the largely different economies in the advanced and developing countries.
And the evidence is everywhere, though at times it seems to be even contradictory. Thus, while on the one hand, as the pattern of growth and poverty reduction spreads and gains momentum in less developed regions, it has continuously nibbled away at their high dependence on the developed economies. But the very success is throwing up opportunities and challenges like new demographic trends and global warming, which make two entities rather more inter-dependent than ever before. So what would be the outcome of this new convergence, which is happening after almost two centuries of high speed divergence?
The book is about the 100-plus years that began in 1945 and run ups to the middle of the 21st century. And so it may be taken as a mid-term report on two parallel interacting revolutions currently underway. The industrial revolution that emerged in the now advanced countries and the inclusiveness revolution that is now gaining momentum, after almost dramatic spread of the growth in the developing economies, in the more recent decades.
The main storyline of the book is about comprehending the significance of the tectonic changes that will happen when an additional 60% of the world?s populations begin the process of joining the ranks of affluence. In the process it tries to provide meaningful answers to a lot of questions that have been thrown up in recent years like what will happen to the incomes, natural resources and the environment and about the likely outcomes of the global economic and financial crisis. Stabilising and rebalancing the world economy to sustain the growth is no easy task especially when there are no previous lessons to fall back on. But the direction of change is very evident as the baton gets passed on from the G7 to the G20 An interesting proposition highlighted is about the factors contributing to the growth. Rather than limiting the explanation to strictly economic factors Spence argues that other factors like leadership, politics, governance structures and effectiveness of government all play a crucial role in the outcome. Overall the book makes a good attempt to explain the dynamics of the emerging trends in the global economy.
Pointing to India the book says that though the country lags China by fourteen years the prospects are encouraging. By the middle of the century output in India andChina would be both similar. And the two together would produce as much as 60% of the advanced country total. The size of the economy and the roles of USA and EU, on the one hand, and China and India, on the other, would even be reversed.
Though this might sound too far fetched, the very fact that such an outcome is considered within the realms of possibility should help foster greater confidence in India?s ruling elite who seem more content to firefight and move from one crisis to another, with no vision about the responsibilities that India would be forced to carry after just a century of gaining independence from colonial rule.
And some aspects of the various constraints that India currently faces are also examined like the issue of inadequate infrastructure. Pointing to the historical pattern of underinvestment in Indian infrastructure Spence points out that though the persistent fiscal deficit signalled that it will well nigh be impossible for the government to finance the needed projects, it has been able to find a partial solution for the mess by going into partnership with private investors. Though far messier than the Chinese alternative, where the projects are fully government funded, the innovative solution has not gained the attention that it deserves.
Defending John Williamson, the original proponent of the Washington Consensus, Spence notes that Williamson never intended that the central thesis of the Washington consensus would be a belief that governments always screw up things and the only alternative was to ensure that government activity was limited to the bare minimum. He points out that correct insight that markets were of critical importance somehow morphed into the simplistic view that the problem is the government. The crux is that effective governments and markets are both essential ingredients.
So what are the major challenges that India would have to face before moving up the global ranks. One, of course, is the middle income trap, whereby countries stagnate after touching the middle income levels and fail to catch up with advanced countries. Discussing the challenges that need to be faced to avoid such a trap, the book points out that the main reason this happens is because the industries which set the ball rolling and put the economy on a faster track would soon reach the end of their tether once wages rise with the growing success and reduce their global competitiveness. The solution is to move over to more capital and knowledge-intensive industries. But this is often restrained by the policy makers who often set out to prop up the current structure for many reasons including protection of the employment, as it often happens in India too. Here the government has to let the market forces take over and restrict its role to that of a facilitator, which is a little scary and requires a leap of faith, especially in an era when the wisdom of governments is increasingly suspect.
